The U.S. Federal Reserve's Federal Open Market Committee (FOMC) will announce whether the interest rates in the U.S. will increase or remain unchanged tonight at 20:00 South African time.

Market Consensus:

The market outlook is that the FOMC will raise interest rates by 25 basis points (0.25%) to 2.25% later today. An additional 0.25% increase in U.S. interest rates by the FOMC is expected before the end of the year, accelerating its tightening in response to growing inflationary pressure.

The FOMC Statement and Press Conference:

The Federal Open Market Committee (FOMC) statement is used to communicate with investors about monetary policy. It also contains the outcome on the vote on interest rates and will be released at 20:00 South African time.

Following the statement, the FOMC will have a press conference around 20:30 South African time and this is where the economic outlook will be discussed and most importantly clues on future rate decisions.

Impact on South Africa:

The decision will be watched closely by market participants as an increase in the U.S. interest rate might have a positive effect on the Dollar (USD). Dollar (USD) strength will put pressure on Emerging Market Currencies so we can expect the Rand (ZAR) to depreciate if the Dollar (USD) remains in favour.

As a result, we can expect an overall price increase in retail goods and services (Financial) filtering through to the S.A consumer. Along with an increase in the Oil price it is anticipated that the domestic consumer will remain under immense pressure in the medium term.

USD/ZAR outlook:

The Rand (ZAR) has been gaining strength against the Dollar (USD) over September and is currently consolidating above the R14.10 Price level.

We might see the Rand (ZAR) weaken even further beyond the R 14.59 price level if we see U.S interest rates being raised and the Dollar (USD) start to strengthen once more.

Source – Bloomberg

Trading Strategies:

An increase in U.S interest rates will see the Dollar (USD) strengthen, so look at the following:

South African instruments:

• Bank stocks.
• Retail stocks.
• Rand hedged stocks.
• Alsi (Index).
• USD/ZAR (Forex pair).

Major Forex pairs:

• EUR/USD.
• GBP/USD.
• USD/JPY.
• USD/MXN.

The inverse is applicable where there is an increase in interest rates then that will have a negative effect on equities so look at the following:

Major Indices:

• S&P 500.
• Wall Street 30.
• Nasdaq 100.
• Russell 2000.

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